Click to read the original text for details 01 Over 20 years ago, during the heyday of China's wholesale markets, I went abroad for inspections and found that in developed countries, except for fresh produce, there were no wholesale markets for manufactured goods. So, I proposed a concept at that time: As a country's economy matures, wholesale markets will gradually fade from the stage of history. Fresh produce is an exception. Why is fresh produce an exception? Because the supply chain for fresh produce has always been long, with multi-level wholesaling being the norm. Moreover, the "centralized pickup" in fresh produce wholesale markets indeed helps reduce transaction costs. Fresh produce wholesale includes both "reverse wholesale" in the procurement stage (e.g., going door-to-door in rural areas to collect free-range eggs) and "forward wholesale" in the sales stage, making it the most complex form of wholesaling. My understanding of the concept of reverse wholesale came from an American marketing textbook. If community group buying can bring about a revolution in the fresh produce supply chain, it would be a great merit. 02 Channel Revolution and Supply Chain Revolution Channel and supply chain are two perspectives on the same issue. Some also view the two terms as synonyms. Looking from the manufacturer towards the user, it's a channel; looking from the merchant towards the upstream, it's a supply chain. China's channel revolution was driven by manufacturers through two market center descents in 1998 and 2000—from "provincial distributors" to "city distributors" and then to "county distributors"—and then through deep distribution after 2002, reaching directly to terminals. Before the channel revolution, China had a long-channel model with multiple layers of wholesaling: provincial first-tier, city second-tier, county third-tier, and township fourth-tier. The current channel structure is basically county (district) as first-tier, directly supplying terminals, with a second-tier covering small shops. China's channels were set in the deep distribution that began in 2002. It's not an exaggeration to list deep distribution as an important channel revolution in China. New retail is about disintermediating the existing deep distribution channel structure. However, the main channel for FMCG is still primarily deep distribution. Currently, no link is redundant, including the second-tier distributors that are often targeted for "disintermediation." There are forgotten corners in the channel revolution, and the categories covered by group buying platform supply chains are exactly those forgotten by deep distribution. The main reason is the high fragmentation at the source of these categories. Fresh produce, primary processed products, long-tail products, and niche products all have fragmented sources, lacking the organizational power needed for a channel revolution. The corners forgotten by the channel revolution have become the protagonists of the supply chain revolution in the era of group buying platforms. Of course, this presupposes the success of group buying platforms. The direction of the channel revolution is for manufacturers to compress channel levels from the source, while the supply chain revolution is for platforms to reduce channel levels from the end (group leaders). The commonality is reducing channel levels, but the difference is the direction of reduction. Group buying platforms can initiate a supply chain revolution because group leaders have the ability to mobilize users. The channel revolution represented by deep distribution essentially compresses channel length and reaches terminals directly. The group buying supply chain revolution still compresses supply chain length and reaches users directly. This is a more meaningful revolution than deep distribution. Since the essence of the channel revolution is compressing channel length, let's start with the categories with the longest channels. 03 Current State of Fresh Produce: Long Channels The five categories for community group buying are: 1. Fresh produce and fresh packaged products (excluding vegetables); 2. Primary processed products; 3. Long-tail products; 4. Niche products; 5. Marginal standard products. Except for marginal standard products, these categories share a common feature: small scale at both ends of the supply chain. From the source, the operating entities at the supply chain source are small; from the other end, the user base is small, mainly household users. Small at both ends inevitably leads to long channels. The sources of fresh produce are farmers, fishermen, herders, and mountain dwellers; primary processed and long-tail products come from small factories and workshops; long-tail and marginal standard products are also not large in scale. Except for marginal standard products, where the scale is due to weak operational capability, the small scale of other categories is determined by the characteristics of the category's supply chain. After the household contract responsibility system, the family became the production unit, with very small average farmland per household. This is a basic national condition. Field crops (the three main grains) can achieve large-scale operation through land transfer due to mechanization. The special characteristics of China's cash crops make mechanization difficult, and labor is the main workforce. Even after land transfer, scale remains limited. For example, if two households with 5 mu each transfer to one household with 10 mu, it's still small-scale operation. Only a few cash crops, such as potatoes and bananas, have achieved large-scale operation. When both ends of the supply chain are small, it either forms a long channel or a large platform. A long channel is the current reality; a large platform is the ideal state of the supply chain revolution. The agricultural product supply chain has traditionally been multi-link and long-channel. How long is the agricultural product channel? In the origin procurement stage, there are second-hand dealers, third-hand dealers, and fourth-hand dealers, roughly 2-4 procurement wholesale links; in the sales area wholesale stage, there are also 2-4 wholesale links. On average, it can be up to 6 links. Because of the long channel, the comprehensive gross margin is high. The supply chain channel revolution is about significantly reducing supply chain links, truly achieving direct supply from the source, with high gross margins and strong competitiveness. For product categories with small ends in the supply chain, the source will definitely not engage in deep distribution channels. Deep distribution is only feasible for large enterprises, but it's possible to transform from a long channel to a large platform. Group buying platforms are turning the current supply chain from a long channel into a large platform. This is both an opportunity and a mission! 04 Direct Supply from the Source The closer to the source, the higher the gross margin. However, the closer to the source, the harder it gets. Finding the right source is the key. Many people now emphasize direct supply from the source for fresh produce, which is a bit far-fetched. Who is the source of fresh produce? Is it farmers (fishermen, herders, mountain dwellers)? Farmer cooperatives? Agricultural bases? The government? Associations? Agricultural service providers? In the early days, fresh e-commerce companies went to rural areas with money to buy directly and suffered heavy losses, and no one has done that since. There are two reasons: first, farmers are too small in scale, requiring intermediaries to achieve scale; second, farmers sell at market prices, and prices rise when purchases increase. Direct supply from the source is definitely not direct supply from farmers. Those doing e-commerce online now are not farmers who grow crops, or at least their main occupation is not as farmers. A farmer's few acres of vegetables can be sold in a day or two; if not sold within a day or two, they will spoil. Those who can sell vegetables every day must be buyers. Only buyers can ensure a daily supply of vegetables; individual farmers cannot. My conclusion is: Scattered farmers are only agricultural growers (producers), not operators of agricultural products. As the source of fresh produce, they are passive. Farmer cooperatives for field crops are relatively large in scale, but cooperatives for cash crops are still small and cannot achieve direct supply from the source. Moreover, there are not many truly closely-knit cooperatives. Furthermore, even under the conditions of one town one product or one village one product, supply is still highly seasonal. Agricultural bases seem large, but they are not economic entities; they are vague geographical concepts. Of course, agricultural bases indicate a relatively large overall planting scale, which is beneficial for supply chain stability. Associations are not economic entities, and the government is not an operating entity. They are not supply chain sources. There is an operating entity that has not attracted attention, namely agricultural service providers. Farmers have no scale, but service providers can have scale. Agricultural service providers do not serve a single farmer but serve a large number of farmers. For example, some tea service providers can serve millions of mu of tea farmers. In areas where service providers are developed, seeds, pesticides, fertilizers, and agricultural technology are all guided by agricultural service providers. It can even be said that what determines the safety and quality of agricultural products is not farmers but agricultural service providers. If the functions of agricultural service providers are extended, they can become the source of the fresh produce supply chain. Take a well-known example of a service provider: Chu Orange. Chu Shijian was not a farmer, but he organized farmers to plant according to unified standards, then centrally purchased and sold. In this system, farmers are only growers, and Chu Shijian played the roles of both agricultural service provider and agricultural brand operator. The conclusion of the above analysis is that the fresh produce supply chain must be B2B, not C2C or C2B. Finding the right supply chain source (B-end) is key to establishing a quality-controlled and stable supply chain. 05 Cobweb Theory When doing fresh produce group buying, it's necessary to understand the cobweb theory. It was proposed independently in 1930 by Schultz of the United States, Ricci of Italy, and Tinbergen of the Netherlands. In 1934, it was named the cobweb theory by Kaldor of the United Kingdom. This is because the equilibrium adjustment process, when reflected on a two-dimensional coordinate graph, resembles a cobweb, hence the name. This theory examines the equilibrium changes that occur when the price fluctuations of certain commodities, especially agricultural products, affect production in the next cycle. Its assumptions are: under perfect competition, individual firms and individuals believe they cannot change the price of a commodity, only the quantity produced. This commodity takes a long time to produce, and during the production process (within the production cycle), the scale of production cannot be changed. The current market price is determined by current demand, and current production is determined by the previous period's market price. The cobweb theory can be understood as: as long as agricultural product prices are high, farmers collectively follow the trend and plant more, causing prices to fall; as long as prices fall, farmers collectively exit, causing prices to rise. This repeats, with production and prices fluctuating cyclically, like a cobweb. Therefore, purchasing agricultural products is like futures trading; you have to bet on future prices. Origin prices for agricultural products change daily, or even several times a day. But sales area prices change at a slower pace than origin prices. The risk is borne by channel intermediaries. In group buying supply chains, it's borne by the supply chain. During rural research, I saw firsthand that when prices rise, farmers sell their agricultural products in the morning and buy high-grade fertilizer when they return; if prices fall to the bottom, they only water and don't fertilize. There's an online case. An e-commerce-savvy person saw that agricultural products in a certain area weren't selling, so they listed a price online and sold them, then went to buy from farmers. The farmers instead raised prices on the spot. Because the online price was set when prices were low (when products weren't selling), after the price increase, this person suffered heavy losses. Good intentions didn't get a good reward. Wang Shouren's concept of supply chain diseconomies of scale, reflected in fresh produce, is that sudden large-scale purchases actually raise prices, unless a stable large-scale supply chain system is established. The theoretical basis can be explained by the cobweb theory. The cobweb theory shows that the fresh produce supply chain carries extremely high risk. There are two main ways to mitigate risk: First, futures, but futures require large-scale operation, which cash crops currently cannot achieve; second, the price system implicitly includes a risk premium. If you make 3 deals and lose on 1, you can still make money. 06 Group Buying Supply Chain: Paradox A paradox is self-contradiction. Pre-sale, 24-hour delivery, self-pickup. These are the three major features that community group buying boasts. Many platforms now implement "Double 11" group buying: orders close at 11 PM, and group leaders complete user delivery by 11 AM, leaving no more than 2-3 hours for supply chain delivery. Pre-sale means the order quantity is uncertain; ultra-short delivery time for suppliers means that before order cutoff, they are essentially in a pre-delivery state. Simultaneously meeting these two conditions means: 1. Supply chain procurement quantities can only be estimated; 2. Suppliers must stock up in advance, and the stocking point must not be too far from the platform's sorting point; 3. Over-stocking or under-stocking means suppliers bear the risk. This is exactly the problem with current capital-backed group buying: 1. Fresh produce can only be sourced locally; 2. Local sourcing has no price competitiveness; 3. Suppliers bear stocking risks and must add a risk premium to prices, making prices uncompetitive; 4. Prices are uncompetitive, and users are price-sensitive for fresh produce, so they can only burn money to drive traffic. Therefore, capital-backed group buying burning money can be seen as both a strategic layout and a tactical helplessness. What is realistic is reasonable. The long channel for fresh produce is a problem, but it's also a solution to mitigate supply chain risks. The risks of fresh produce are spread across each operating entity through the long supply chain. So, what risks might a new supply chain that reaches as close to the source as possible create? First, when long and short supply chains coexist, pre-sale prices can only benchmark against long supply chain selling prices. The selling price is determined by the sales area price. Second, when long and short supply chains coexist, procurement prices can only benchmark against origin prices. Because the purchase price is a collective transaction behavior, similar to the stock price formation mechanism. According to price theory, agricultural product prices are typically competitively determined, with supply and demand determining prices. Both sellers and buyers are only "price takers," not "price makers," unless the product is differentiated. Third, under the above conditions, short supply chains have a significant advantage over long supply chains. The gross margin space created by reducing supply chain links is relatively large. Fourth, no matter how short the supply chain, there is still a time lag between procurement and sales. The price risk from this time lag must be borne by the operating entity. In a long supply chain environment, there are many links, and more operating entities bear price risk. Fifth, in the process of supply chain flattening, the internal hierarchy of the procurement entity must correspondingly increase. During channel flattening and deep distribution, for every channel link removed, the manufacturer's internal management level increases by one, always maintaining internal levels + external levels equal to 6. Similarly, when fresh produce supply chain links are reduced, because farmers' planting scale hasn't changed much, for every supply chain link reduced, internal levels increase by one. The above analysis shows that if the internal management cost of a short supply chain has no advantage over the external transaction cost of a long supply chain, then a short supply chain may not have a price advantage. Nobel laureate Coase's transaction cost theory addresses this issue. Since fresh produce supply chain operators are mostly individual businesses, they have cost advantages. At the same time, the price risk originally borne by many supply chain entities is transferred to the short supply chain. Of course, some say that current group buying platforms and group wholesalers have many people doing short supply chains, so why isn't this problem prominent? It's simple. The current social group buying supply chain is still using personal resources for small-scale experimentation, doing it if profitable, and abandoning it if not. It's not using organizational resources for large-scale operations. 07 Supply Chain Revolution: Large Platforms The channel revolution for standard products, through deep distribution, goes from source to terminal. Through bC integration, it achieves from source (factory) to user. China's channel evolution has been achieved through early channel flattening and deep distribution, plus current bC integration. This is a revolution that gradually extends from the channel source to end users. The supply chain revolution for non-standard products is in the opposite direction: first complete bC integration, then the supply chain platform traces upstream to the source, reaching as close to the source as possible. Therefore, the revolution for standard products is called a channel revolution (from the brand owner's perspective), while the revolution for group buying is called a supply chain revolution (from the consumer and business perspective). The difference in names is because the leaders stand in different positions: looking downstream is a channel, looking upstream is a supply chain. Fresh produce wholesale markets still exist even in developed Western countries where standard product wholesaling has nearly disappeared. Those familiar with the history of China's wholesale markets should know that whether an industry is mature can be judged by whether it still has wholesale markets. Wholesale markets are a long-tail market, a multi-link, long-channel market. Perhaps my understanding of the supply chain revolution differs from Wang Shouren of Youjing Youtian. He believes the supply chain revolution is about Mengniu and Yili reaching users directly through group buying platforms. I believe the target of the community group buying supply chain revolution should be non-standard products. The supply chain revolution for standard products is nearly complete; bC integration can achieve a perfect connection from source to end user. The supply chain revolution for non-standard products cannot be completed by one platform or one supply chain enterprise; it is the result of society-wide supply chain transformation. During this transformation, enterprises with model innovation will undoubtedly gain dividends. The targets of supply chain transformation are first the traditional long supply chain, and second the growers, promoting large-scale agricultural operation in China. Source: Teacher Liu's Digital New Marketing (ID: liuchunxiong1964j) [Southern Black Sesame Group Beverage Business Unit General Manager Cheng Fuliang] Salute to channel partners, meet in Chengdu, August 31 - September 2, 2022 (7th) China FMCG Channel Innovation Conference. -END-